The Aging of America: Implications for Social Security, etc. American Academy of Actuaries Summer Summit Presented by Steve Goss, Chief Actuary & Alice Wade, Deputy Chief Actuary Social Security Administration July 14, 2014

22 Developed nations are “aging” u “Macro Aging” Shift to older age distribution, because Lower birth rates Fewer working age per elder u “Micro Aging” People are living longer Lower death rates Higher life expectancy u Different Challenges—Different Solutions---Consider the U.S.

3 Macro Aging results from the drop in Birth Rates after 1964—Had Birth rates stayed at 3.0 or

4 Macro Aging has already affected disability ages, and is poised to affect retirement ages

5 Implications of “Macro Aging” u It is a Pay-As-You-Go World –In the aggregate; consumption = production u Consider drop in birth rate from 3 to 2 –The older age distribution requires: »Elders consume less--- 2/3 as much, »Working age share more---3/2 as much, »Get elders to work a lot longer---5 years, »Or some combination u The old promise of capital deepening –We are NOT closed economies

6 Cause of “Micro Aging” Declining death rates

7 Implications of “Micro Aging” Rising Life Expectancy

8 Implications of “Micro Aging” u Most people are not saving enough –Desire/need to “consume now” u Those who are saving do NOT annuitize –We have succeeded too well on accumulation? »Once accumulated, people won’t give it up –Annuities are not valued or understood »Fear of getting run over by a truck »Commercial annuities are expensive »Ford and GM now offering lump sum options »Even Social Security delayed retirement does not attract

9 Implications for Social Security  Micro aging”- increased longevity  Gradual and manageable effects  “Macro aging”- changing age distribution due to drop in birth rates  Major abrupt shift with no obvious solution  Different challenges: different solutions

10 Potential for 23% Benefit Reduction Will Force Action Need to reduce cost 25% or increase revenue 33% OASDI Annual Cost and Non-Interest Income as Percent of Taxable Payroll OCACT/SSA, May 15, 2009

11 “Micro Aging” Solution u For the “micro aging” challenge, increase the Social Security normal retirement age to maintain the ratio of expected retirement duration to potential work years: LE(NRA) / (NRA – 20) = constant  For pay-as-you-go system, this makes financial status neutral under increasing life expectancy  We estimate this index results in increasing the NRA one month every two years after 2022  Saves18 percent of our long-term financing shortfall  Can hold low earners harmless—Simpson/Bowles

12 “Macro Aging” Solutions: Many Choices u Raise Scheduled Revenue Increase payroll tax rate Increase taxable maximum Increase revenue from taxation of benefits Find other sources of revenue, expand coverage u Lower Scheduled Benefits Change benefit formula Reduce benefits for dependents Reduce cost of living adjustments u Benefit Adequacy Increase benefits for lower income by establishing a minimum benefit Increase benefits for widows and widowers, childcare credits, student benefits, increase benefits for oldest

Solutions: Raise taxable maximum for 90% intended of the early 1980’s. Or Higher like HI

14 Solutions Adjust the Benefit Formula: formula shown for those newly eligible in 2014 Can change bend points or formula factors

Call for Action u Decide what the American public wants u No action – automatic benefit cuts u Enacting Change Relatively Soon  More advance notice  Gradual change  More options 15

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